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Getting Started in Chart Patterns -Thomas Bulkowski (Book Review )

CHART PATTERNSThomas Bulkowski is probably the best known chart pattern researcher. Among his credits are theEncyclopedia of Chart Patterns and the three-volumeEvolution of a Trader. In this second edition ofGetting Started in Chart Patterns (Wiley, 2014), a book originally published in 2006 and newly revised and expanded with updated statistics, he introduces more than forty chart formations. Better yet, he explains how to trade using them.

Although the title indicates that the book is for novices, it is equally valuable—perhaps even more valuable—for more experienced pattern traders. Without continually reviewing, testing, and revising pattern trading strategies, it’s all too easy to trade yesterday’s market.

In two action-packed chapters Bulkowski explores trendlines and support and resistance. He considers support and resistance to be “the most important chart patterns” because “they show how much you are likely to make and how much you are likely to lose on each trade. That’s like playing poker and knowing the hands of your opponents. You won’t always win, but it helps.” (p. 35)

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Recipe for catching a reversal:

Ingredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.

Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.

Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.

Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.

Presentation: Dish is ready when “failure” point of pattern is breached; serve at market or with trailing stop, whichever you prefer.

Willingness to Make Mistakes

“[Michael Marcus] also taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. [He] taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.”

– Bruce Kovner, Market Wizards

Bruce Kovner, now retired, is one of the all-time trading greats.

His observation is strikingly similar to the Soros observation (paraphrase): “It doesn’t matter how often you are right or wrong — what matters is how much you make when you are right, versus how much you lose when you are wrong.”

In many ways trading is remarkably different from any other profession. Imagine if doctors, lawyers, or company executives were encouraged to “make mistakes” on a regular basis. (They do make mistakes of course. They just can’t admit them, let alone be open about them.) (more…)

Trading Quotes

“Jesse Livermore described Wall Street as a ‘giant whorehouse,’ where brokers were ‘pimps’ and stocks ‘whores,’ and where customers queued to throw their money away.”
The Economist

Another psychological aspect that drives me to use timing techniques on my portfolio is understanding myself well enough to know that I could never sit in a buy and hold strategy for two years during 1973 and 1974, watch my portfolio go down 48 percent and do nothing, hoping it would come back someday.
Tom Basso

With the title alone causing hysterics, placing this on your coffee table will elicit your guests to share their best dot-com horror story. How they invested their $100,000 second mortgage in Cisco Systems at $80 after reading about it, waiting for it to become $500 (as predicted in this very book) only to see it dive to $17. Just the thought of this book gives me the chuckles.
Amazon.com Review of Dow 36,000

You will run out of money before a guru runs out of indicators.
Neal T. Weintraub

There is little point in exploring the Elliott Wave Theory because it is not a theory at all, but rather the banal observation that a price chart comprises a series of peaks and troughs. Depending on the time scale you use, there can be as many peaks and troughs as you care to imagine.

If you want a guarantee, buy a toaster.
Clint Eastwood

You have to say, “What if?” What if the stocks rally? What if they don’t? Like a catcher, you have to wear a helmet.
Jonathan Hoenig, Portfolio Manager,
Capitalistpig Hedge Fund LLC

There is no greater source of conflict among researchers and practitioners in capital market theory than the validity of technical analysis. The vast majority of academic research condemns technical analysis as theoretically bankrupt and of no practical value…It is certainly understandable why many researchers would oppose technical analysis: the validity of technical analysis calls into question decades of careful theoretical modeling [Capital Asset Pricing Model, Arbitrage Pricing Theory] claiming the markets are efficient and investors are collectively, if not individually, rational.

The biggest cause of trouble in the world today is that the stupid people are so sure about things and the intelligent folks are so full of doubts.
Bertrand Russell

We are what we repeatedly do. Excellence, then, is not an act, but a habit.
Aristotle

Forecasts are financial candy. Forecasts give people who hate the feeling of uncertainty something emotionally soothing.
Thomas Vician, Jr., student of Ed Seykota’s

Never let the fear of striking out get in your way.
Babe Ruth

The Henry theory— statistically corroborated, of course—is that assets, once in motion, tend to stay in motion without changing direction, and that turns the old saw— buy low, sell high—on its ear.

Enron stock was rated as “Can’t Miss” until it became clear that the company was in desperate trouble, at which point analysts lowered the rating to “Sure Thing.” Only when Enron went completely under did a few bold analysts demote its stock to the lowest possible Wall Street analyst rating, “Hot Buy.”
Dave Barry
February 3, 2002

“If you don’t risk anything, you risk even more.”
Erica Jong

“No matter what kind of math you use, you wind up measuring volatility with your gut.”
Ed Seykota

10+1 Rules If You USE Charts

Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.

If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.

Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.

When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I  must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?

Rule 3 – You can torture a chart to say anything you want. Don’t do it.

This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever. (more…)

Our 10 Trading Resolutions for 2015

  1. We will only take the very best trade set ups in 2015 discarding the average and mediocre ones.We want each trade to have an excellent risk/reward ratio.
  2. We will position size based on the worse case scenario for volatility and range expansion not what I think is a safe bet.
  3. We will use more option contracts when their volume permits in my trades to limit my risk to the size of the option contract instead of using so much capital to trade equities.
  4. We will limit my total risk exposure to only two trades on at a time.
  5. We will focus on limiting my losses and drawdowns in 2015 to in return maximize my gains.
  6. We will be looking to structure trades for a more consistent monthly return by trading stock indexes primarily.
  7. We will focus on understanding the emotions  that arise during my trades, each trade will be made with a clean slate focused exclusively on current price action.
  8. We will be in absolutely no hurry to place trades. I will be waiting for trades to come to me.
  9. We will flow with the patterns and price action of the markets and restrain from bias and options. Signals will be my guide.
  10. We will double my efforts in backtests and chart pattern studies of historical charts.